Good day, everyone, and welcome to i3 Verticals Fourth Quarter 2021 Earnings Conference Call. Today’s call is being recorded, and a replay will be available starting today through November 25. The number for the replay is (877) 344-7529 and the code is 10161739. The replay may also be accessed for 30 days at the company’s website. At this time, for opening remarks, I’d like to turn the conference call over to Scott Meriwether, Chief Operating Officer. Please go ahead, sir.

Good morning, and welcome to the fourth quarter 2021 conference call for i3 Verticals. Joining me on this call are Greg Daily, our Chairman and CEO; Clay Whitson, our CFO; and Rick Stanford, our President. To the extent any non-GAAP financial measures discussed in today’s call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by reviewing yesterday’s earnings release. It is the company’s intent to provide non-GAAP financial information to enhance understanding of its consolidated financial information as prepared in accordance with GAAP. This non-GAAP information should be considered by each individual in addition to, but not instead of the financial statements prepared in accordance with GAAP. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding the company’s expected financial and operating performance and the expected and potential impact of COVID-19 pandemic. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. You are hereby cautioned that these forward-looking statements may be affected by the important factors, among others, set forth in the company’s earnings release and in reports that are filed or furnished to the SEC, including risks and uncertainties associated with the COVID-19 pandemic. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. Finally, the information shared on this call is valid as of today’s date and the company undertakes no obligation to update it, except as may be required under applicable law. I’ll now turn the call over to the company’s Chairman and CEO, Greg Daily.

Thanks, Scott, and good morning to all of you. We are pleased to report our fourth quarter 2021 results. We set new quarterly records in revenue, adjusted EBITDA, software revenue, payment volume and integrated volume. As we close our fiscal year, we’re extremely excited about what fiscal year 2022 holds for i3. Our vision has been to grow into a software company that focuses on embedded payment opportunities. Our results highlight consistent execution of this vision as software revenues have grown to 42% of our total revenue and integrated payments now represent 63% of our payment volume. We have great momentum throughout i3. I expect this momentum will continue to drive further growth in our technology-enabled revenue. Our total software and related services revenue was up 178% for the quarter over this time last year. The increase in software and related services fueled our fourth quarter net revenue increase of 76% over 2020. Our adjusted EBITDA increased 79%. We are delivering on our software-focused strategy. For fiscal year 2021, our adjusted EBITDA from Proprietary Software and Payments segment exceeded the adjusted EBITDA from our Merchant Services segment. The $11 million of adjusted EBITDA from our Proprietary Software and Payments segment was a new quarterly record. Our Software segment will be our primary driver going forward. And we expect this trend to accelerate as we expect more total software sales to increase, and we attach other value-added solutions such as payments within our customer base. Public sector is our largest vertical. There is a need for modern software and payment solution within this market. We believe our software solution can digitally transform how governments interact with their constituents. Our product suite streamlines back-office work streams and also enhances customer-facing experience for governments. For example, our software allows citizens to electronically found…

Good morning. The following pertains to the fourth quarter and fiscal year ended September 30, 2021. Before getting to results, I want to update listeners on a recent accounting development. During our discussion of the third – fiscal third quarter ended June 30, we highlighted a change in presentation regarding the write-down of deferred revenues in connection with the acquisition of companies with software revenues. As we hoped, the FASB has removed requirements under ASC 805, that necessitated the write-down of deferred software revenues by acquirers. Beginning with acquisitions completed after September 30, 2020, we have adopted the change, leaving only $600,000 of write-downs during fiscal 2021 held over from acquisitions completed during fiscal year 2020. Going forward, we will not need to write down deferred software revenues in connection with acquisitions in the first place. We consider this a very welcome development, which better aligns our GAAP results with our performance and restores a level playing field with our peers. Moving on to results. Please refer to the slide presentation titled Supplemental Performance on our website for reference with this discussion. We had another solid quarter with record payment volume, revenues and adjusted EBITDA. Revenues for the fourth quarter ended in September increased 76% to $67.2 million from $38.3 million for Q4 2020, reflecting healthy organic growth in acquisitions. The momentum was – we experienced during the June quarter, continued through September quarter and October and the early part of November. Almost all of the metrics we track are headed in the right direction. For companies we have owned for at least two years, payment volumes to continue to grow in the mid-20% over a two-year period. To clarify, that represents total growth, not compound annual growth. Our integrated payments percentage hit a new high of 63%, helping our…

Thanks, Clay. Good morning, everyone. I’ll begin with an update on a few things I’ve addressed before. After that, I will discuss M&A. First, we are aggressively moving on our unified product offering within our public sector vertical. Over the last quarter, we have expanded both our geographic and product reach with i3 software solution sales in North Carolina, Georgia, Alabama and Tennessee. We’ve also successfully secured multiple AI judicial product software sales in North Carolina, Georgia and Tennessee through a collaboration among i3 public sector entities. Our utilities companies have expanded into Alabama with our billing solution, and we also signed our first state level court contract in Georgia, which encompasses multiple types of courts within accounting. Additionally, we recently signed and secured a significant statewide contract with LCRAA, the Louisiana Clerks Remote Access Authority. That was a direct result of our UPO efforts. For the first time, all Parish Clerk of Court will be able to provide their constituents in electronic or in courthouse experience that will be comprehensive and standardized across the state. This solution aligns with LCRAA’s vision for technology support of standardized processes throughout Louisiana. In addition, other state agencies will benefit from unified data feeds from the system. This solution is a result of coordination among seven integrated software solutions by three i3 companies. The solutions include our integrated e-filing, paperless civil and criminal case management systems, AI smart bench and calendaring for Clarks, insight reporting and a fully integrated payment interface. Through our domain expertise and seamless integrations, we are assisting our public sector customers and enabling them to provide an expanded offering of responsive solutions for their constituents. It should be noted that we have seen an average uptick in the number of requests for new product presentations and demonstrations in the…

Ladies and gentlemen, we’ll now begin the question-and-answer session. [Operator Instructions] Our first question today comes from John Davis from Raymond James. Please go ahead with your question.

Hey, good morning, guys. Maybe a couple of quick ones just on the healthcare deal that you guys just recently closed in October 1. So Rick, I appreciate the commentary on valuation ranges. But maybe Clay, just help us margins similar to corporate average? Just trying to kind of back into the revenue impact competed than the guide.

Yes. We expect margins in the 20%s area like most of our businesses.

Okay. And then, Rick, you talked a little bit about the revenue synergy potential here. The business today, is it 100% software? Or – what’s the payments and software kind of revenue split as the business stands today?

The payment piece is small today of total revenue. That’s a big opportunity for us and obviously, cross-selling products into our other healthcare businesses. It’s more of a services model. JD, it’s – they have some software revenues, obviously, but they’re dependent on services where they use their software to perform those services.

Got it. Okay. And then just on the guide, Clay, I think, obviously, at the midpoint, it’s a 27% rev growth. My math is getting somewhere low-double digit on the organic side. But just any commentary there on kind of what the organic growth implied in the guide is.

Yes, it is. We do expect double-digit growth this coming year.

Okay. Great. And then margins, I think, are implied about 26% or so, that’s about 100 basis points. Is that mostly organic? I think most of the deals you’ve done have been around the corporate margin level. So just curious there if that’s kind of the way we should think about margins going forward, kind of 100 basis points or any color there?

Well, at the midpoint, I get 25.5%, which is not quite 100 basis points. But where we expect to get our leverage is on the corporate line. If you look at the fourth quarter, as an example, we fell from 7.2% of revenues to 6% of revenues on the corporate line. So the corporate expenses are relatively fixed. And as revenues go up, we get pretty good leverage there.

Okay. Last one on the guide quickly, Clay. So if you just take 4Q and you annualize it, when you add in the deal, you kind of get the midpoint of the guide. So I guess the question is you clearly it appears to me to be conservative, but maybe just talk about some of the factors that could swing it to the higher end of that guide closer to $80 million in vice versa. How much conservatism is built in for unknown impacts of Delta over the next few months.

Yes. When I think about the variability in our earnings, I think of two things, which I’m sure you all do, but one is the general economy. The Delta variant, I feel like it’s not a very scientific number, but internally, we feel like we’re back like 90% from that. Restaurants are open, but if they used to hold 100 people now, they hold 60 people, California keeps going in and out, Hawaii, but anyway, we feel like there’s another 10% upside on just the general economy. We’re forecasting as if it remains the same as it is today. And the other big factor in our earnings variability is a perpetual license deliveries. Those are almost 100% margin. They dropped straight to the bottom line. In our Q4 of this year versus our Q4 of last year, perpetual sales fell from 15% of the total to 9% of the total. And so in any given quarter, that’s a fair amount of percentage margin and bottom line.

Okay. Very helpful. That’s it for me, guys. Thanks.

Our next question comes from George Mihalos from Cowen. Please go ahead with your question.

Great. Congrats on the results, guys. I wanted to ask, Clay, you talked about or you mentioned sort of seasonality, and there are some changes going on in your business, obviously, compared to sort of historical norms, you don’t have as big of an education business, a lot more sort of public sector and health in there. So just anything you can kind of call out or you may want to sort of point us to as we think about modeling the next fiscal year on a quarterly basis?

When we look at it, there are different factors in different quarters. We have a company that does licenses for all types of boards like nursing boards, that sort of thing. They’re strong in the calendar fourth quarter. I think we’ve spoken about the warrant round up in the past. So in some of our companies, after people get tax refunds, they come out and pay their traffic tickets and respond to warrants. And so that’s a bump for us in the March quarter. In the fourth quarter, the September quarter, we have our best education quarter. But so all these things sort of balance out. And so I think the best – if there’s a weak quarter, it’s the June quarter when schools are completely closed. But I think the best advice I could give is just to model it with a little bit of growth every quarter. So the back half of the year would be a little steeper than the front half, but we’re not as seasonal as we used to be because of our diversification across verticals.

Okay. That’s helpful. I appreciate that color. Then maybe just a question for Rick here. As you think about the M&A pipeline, just some of the smaller verticals, I think, now sort of hospitality, B2B non-profit, is that really still a focus for the company given the opportunity you have in public sector and health? And obviously, you expect schools to start coming back? And are you at all constrained even if it be temporarily from a leverage standpoint near-term?

Yes, George. So public sector and health care are our focus going forward. That’s not to say that if we find something in B2B or non-profit, we won’t take a look at it, but we want you to understand the public sector and healthcare, our big focus on M&A going forward, and that’s the majority of our pipeline today. The second question you ask was, what was that?

Just related to leverage, Rick, you feel at all constrained near-term based on the leverage ratio.

No. depending on my partner, Clay, I’m continuing to go out and look for deals, the entire M&A team. The pipeline is still full. There’s plenty of stuff out there and people want to talk. So we’re keeping the pedal to the middle.

Yes. I mean, we cash flow a fair amount. And so I think last quarter, people felt like we were a little constrained, but we just did a $60 million acquisition and we’ll pay it down again by December. So our usual deal, $60 million is pretty big for us. Our usual deals are much smaller. And if Rick does find something that’s outsized, we’ll figure out a way to finance it.

Okay. Great. Thank you guys. Congrats on the quarter.

Thank you.

Thanks, George.

Our next question comes from Peter Heckmann from D.A. Davidson. Please go ahead with your question.

Good morning and congrats on the Louisiana deal. It sounds like a real nice opportunity. As regards to that one, is that a – would that be structured as a multiyear deal that has both fixed fees and variable fees. And then as well, when would you expect – if that deal has a perpetual license? Or when would you expect to begin recognizing revenue on the LCRAA deal?

Pete, we’ll get a little bit of it in fiscal 2022, like in the fourth quarter, some payment revenues for e-filing, but the bulk of it will be over three to five years. And so this is something – I hope people will understand about our business is that, this contract is great for us. In the short-term, we’re going to need to hire 15 pretty pricey people to build some things and customize some things over the course of the year and then get it installed. And so for fiscal 2022, it won’t help our bottom line. But for the out years, it really will. And a number of our businesses that are that way, if we’re lucky enough to land big contracts, I can think of a couple in healthcare that would act this way. Also, we’ll need to staff up invest for six months to a year before we reap any rewards from it. But that’s certainly the case with the LCRAA contract you brought up.

That’s great. That’s great. And then just bigger picture on – you really built an impressive list of functionality in software and public sector and crossing a number of different areas from courts to public sector to citizen engagement. Have you thought about an umbrella brand just to unify? I mean, is the umbrella brand i3 Verticals or have you thought about potentially creating a new brand that all of the – that would really mean something to public sector over time as you build your roster contracts.

Yes. Good question. We are continuing to allow the individual sub companies to use their DBA. But – We’ve added the i3 public sector brand, and that’s how we’ll brand by vertical. And most of the shows they attend today, all of the materials and the booth itself as i3 public sector. So we’re moving in that direction. It’s gradual, but that’s definitely the way we’re going.

Okay. All right. That makes sense. That’s all I have right now. Thanks.

And our next question comes from Jason Kupferberg from Bank of America. Please go ahead with your question.

Hey, guys. This is Cathy on for Jason. First, I just wanted to go back and ask about margins. I guess a two-part question there. So first, obviously, you guys have some seasonality. So like the back half of the year is typically stronger. Is that 25% that you guys did in that 4Q kind of the right way to think about it is the jumping-off point when we think about how we – the progression throughout fiscal 2022 and maybe like further acceleration throughout the back half of the year. And then the second part of that two-part question, sort of like, I know historically, you talked about maybe long-term guidance 50 to 100 basis point annual margin expansion, which is obviously materially higher. Even though, it sounds like you guys got some investments in the pipeline as well. Just talk about how we should be thinking about that. Thanks.

Well, this is 80 basis points guidance here. And the first half of this fiscal year through March or certainly through February was still a little depressed from COVID. And so bigger revenues just help leverage that corporate expense line. And so that might account for 80 basis points as opposed to 50 basis points this year. I think our guidance has always been 50 to 100 basis points, but we probably plan more on the 50 basis point range. As far as the seasonality, I think if you grow the quarters by a modest percentage as opposed to focusing on comparisons to the previous year, fiscal 2021, the first half had some distortions, which – it’s just not a normal year to compare off of. 2019 was a normal year. But in any given year, we have acquisitions through the course of the year. So if you look at historical quarters and take percentages, you need to factor out the acquisitions that were made during those quarters. Does that help that was kind of a long answer?

Yes, yes. That was helpful. Yes, we can go back and take a look at that, that’s why. And then I guess, also just wanted to ask, I guess, about revenue growth, obviously, it’s output payment volume growth in the last couple of quarters, understanding that obviously has to do with the business mix and how that’s changed. Can you just talk a little bit about maybe any take rate you’re seeing, trends you’re seeing maybe by vertical or something and its revenue growth is going to grow around, call it, 30% for the full year of 2022? Is volume growth maybe more in the zip code of 20%? Just how – any help on that would be great.

Well, I do expect our revenue yield to continue to increase. It’s been increasing since the IPO. And the principal driver of that is the fact that we’ve been buying software companies. And so in the beginning, software companies usually don’t come with any payment revenues. If they have payment revenues, they’re outsourced to some third-party and the software company getting 20% of it or something. So over time, we add in our own payments and that will increase volume. But in the beginning, there’s not much – there’s no volume to go along with the software revenues. And so that’s why the proprietary software payment segments, revenue yield jumped from 6% to 9% over the year. As far as the Merchant Services segment goes, we’ve – normally, you would expect pretty steady ratio between revenues and volume. I think in the last couple of quarters, what we’ve seen is that there are some revenues in the Merchant Services segment, which are things like monthly fees that don’t carry any volume with them, equipment doesn’t carry any volume with them. And so when the economy bounced back from COVID, volume jumped, but those monthly fees and equipment don’t jump with them. So you have a little bit of a decline there, but we’re getting to pretty normal comparisons now. I do think there’s still some hesitancy in the economy from COVID. But that segment should be pretty steady going forward.

Okay. Yes, that makes sense. So it’s more just like business mix, obviously, not anything that’s really changed. Okay, that’s good to know. And I guess, if I could slip in like a really quick last one. I guess, way back line a couple of years ago, like historically kind of thought the business at the mid to high single-digit organic growth profile. It sounds like you guys are going to grow higher than that, obviously, maybe in the double digits, like kind of given how the business has fall since then by vertical, on the growth profile of the acquired businesses that are now kind of fully integrated into the company. Is that still the right way we should be thinking about it? Or is that actually maybe a structurally higher growing story?

Well, I’m glad you asked this. In 2022, we think we’ll grow double-digit. But like I say, the first half of 2021 was a little bit hampered. 2023 is the question, these rights we give are normally long-term rates. And so 2023, our target is double-digit growth. Our guidance, I think, remains high single digit until such time as we have the clarity of seeing we can sustain a double-digit growth rate. And so our target is double-digit. Our guidance long-term remains high single digit.

Okay. Sounds good. Thank you, guys. Take care.

Our next question comes from Mark Palmer from BTIG. Please go ahead with your question.

Yes. Good morning and thanks for taking my question. You mentioned in your remarks that there is going to be $350 million that’s going to be disbursed through the American rescue plan to state and local governments. And at that is likely to translate into revenue opportunities over the next couple of years. We just saw the enactment of a $1 trillion infrastructure plan as well with, of course, much of that devoted to bridges, roads, et cetera, but it is going to be aimed toward municipalities, state and local governments. Do you see that there’s going to be any incremental benefits or potential benefits for INS from the infrastructure bill as well?

It’s hard to say, Mark. I do think when there’s more money washing around, they find ways to spend it. We’ve heard tell of, things targeted for security, people buying a forklift truck with it. So the vast majority of it gets spent the way that’s intended, but other people find way to spend money when they need to spend it. And so I think the more money, the better as far as the public sector goes, even if it’s not targeted in a particular area digit. Do you…

I agree with you.

And just one more question. We’ve seen a nice progression, both in terms of the percentage of the company settled revenues derived from software as well as the percentage of the company’s total revenues derived from integrated payments. Of course, these are the two major thrusts of the strategy. How do you see those percentages evolving over time? And is there – for example, in terms of integrated payments, is there any point at which there would be a cap on what would be achievable. Thank you.

Well, our target for the software versus payments mix has been 50% for the last several years. We’re now approaching that. And I think we’re adjust – we’ll end up adjusting that target to a higher number, because there’s no doubt in our mind when a customer purchases, services, it’s all about the software, not the payments. The payments is a secondary thing. And so we want to be in the driver’s seat more and more often. We’ve felt the success of owning the software, and that’s clearly where we want to be. So I think that will go higher. As far as the integrated percentage, we’ve always thought we would cap out around 80%, and it will get – should get slower going, the closer we get to 80% that could end up changing. That was a vision from three years ago. You feel any differently about that nowadays.

I agree with you.

Thank you.

[Operator Instructions] And our next question comes from Chris Donat from Piper Sandler. Please go ahead with your question.

Hi, good morning, gentlemen. Thanks for taking my question. Maybe two for Rick on the Louisiana win. Just first, if you could give us some background on it, like was it an RFP? Was it – how long do the sales process was, if you will. And then sort of looking forward, is this one – it seems like the Louisiana Clarkson mode access authority has sort of a unique structure. I’m wondering if there are similar structures out there or is this is kind of a unique transaction, because of how Louisiana is organized and also the Parish system and all that.

Yes. Thanks for your question, Chris. It definitely was a bid process. It took us a while. The pandemic slowed it down a little bit. We found out that we were in good shape probably three months ago and we were dwindled down to a smaller list and then obviously, very excited to get the contract. I think it absolutely is unique. The whole state of Louisiana is unique about how the Parishes operate, who makes decisions, Parish to Parish. We’re very excited for this win. We think it’s going to be wonderful for the Clarks across the state, and we’re excited for our people that had a hand in pulling this off, because it was definitely the biggest contract we’ve ever signed, and it’s a good relationship for us to have. Did that answer all your questions?

Yes, you did and you caused me to think of another one. You just mentioned that the pandemic slowed things down. Is that something you’ve seen elsewhere in the public sector where decision-making has been slowed down and is that now picking up or bidding processes starting that had been delayed because of the pandemic?

Definitely picking up early on in the pandemic, yes, decisions were being delayed projects that we had executed were being delayed, so we couldn’t start those. But we’re full steam ahead right now on all fronts in public sector.

Okay, thanks very much, Rick.

And ladies and gentlemen, at this time, we’ll be ending today’s question-and-answer session. I’d like to turn the floor back over to Greg Daily for any closing remarks.

Thank you, everyone, for participating. I feel like momentum is a keyword that we throw around more than ever here with i3 in all facets of our company. And I think we’ve done a good job explaining our pivot to more of our focus going forward in healthcare and public sector. Stay tuned, there’ll be more updates on that. But things are well. And again, have a good day. I appreciate your participating in our call today.

Ladies and gentlemen, with that, we’ll conclude today’s conference call. We do thank you for attending today’s presentation. You may now disconnect your lines.